Dollar by Dollar, Home Equity Builds into Something Great

In a new blog post published by First American Financial Economist Ksenia Potapov, she discusses the fact that homeownership remains the largest form of wealth building among most households—especially for lower-income households—for numerous reasons. 

First off, renters are not included in this discussion for the simple fact that they do not capture the wealth generated by home price appreciation, nor do they benefit from equity gains generated by making monthly mortgage payments—which can be viewed as a form of forced savings for homeowners. 

According to Potapov, equity gains can make the cost of owning a home cheaper than renting one, especially due to the fact that the 30-year, fixed-rate mortgage can be a great hedge against inflation, especially if it has a sub-three percent rate that was common during the COVID-19 pandemic. 

For most, housing is the largest component of net worth among all types of investments. According to the 2022 Survey of Consumer Finances (SCF), a triennial survey that collects detailed accounts of households’ finances, the median homeowner has 38 times the household wealth of a renter. Homeowners are wealthier than renters at every income level. For families in the bottom 20% of incomes, median net worth was nearly $147,000 for homeowners, and only $3,400 for renters. 

Homeownership is often touted as one of the most effective ways to build wealth, especially for lower income households, for several reasons. Renters don’t capture the wealth generated by house price appreciation, nor do they benefit from the equity gains generated by monthly mortgage payments, which become a form of forced savings for homeowners. Equity gains can make the cost of owning a home cheaper than renting one. Additionally, a 30-year, fixed-rate mortgage, especially for those who locked into a historically low rate, can be a great inflation hedge. 

“Despite the risk of volatility in the housing market, homeownership remains an important driver of wealth accumulation and the largest source of total wealth among most households,” Potapov said. 

The pattern of homes being the most valuable asset most people own has continued for at least the last 30 years, according to historical SCF data. In 2022, home equity (the value of a home less home-secured debt) accounted for approximately 84% of the total net worth of the lowest income households. For households in the middle of the income distribution, home equity represented between 37%-to 68% of net worth, but for households in the top 10% of the income distribution that share was only 23%. 

Potapov continued by saying that while the wealth of lower income homeowning households is primarily tied to a home, households further up the income distribution tend to own a greater variety of financial assets and non-financial assets other than residential property class. 

Another fact of note is that home equity increases over time, even if it is just by a few dollars a month. The difference in the composition of wealth means that fluctuations in home prices will have a much bigger impact on the wealth of lower income families than of those that have a mix of other assets. On average, homeowners experience equity gains of 3%-to-4% per year in the long run. 

House price appreciation between 2019 and 2022, however, was well above average. Median home equity increased 44% between 2019 and 2022, from $139,000 to $201,000. The increase was the largest on record over the history of the modern SCF, dating back to 1989. 

Potapov concluded her post by saying, “It’s possible that what went up so quickly, must come down at some point. There are certainly risks from homeownership, and its benefits are not uniform across all markets. Real estate is local, and some markets may experience strong price growth, while others experience price declines. But, despite the risk of volatility in the housing market, homeownership remains an important driver of wealth accumulation and the largest source of total wealth among most households.” 

Click here to see the blog post in its entirety.